Abstract
This paper introduces a monopolistic competition model containing retail investors with imperfect knowledge and issuers offering complex structured products. The model, for which we provide empirical evidences supporting the issuer’s profiteering by increasing the product complexity, can explain that knowledge asymmetry is the key for the issuer to offer complex product and to enjoy the higher excess profit, thus worsening allocative efficiency. Our empirical analysis reports monotonically increasing mark-up premia, and J-shaped issue amounts with respect to complexity: the former result could be explained in a rational framework considering issuer costs, however, the latter is not the case. Our model proves the empirical results are well explained when knowledge asymmetry between issuer and investors is a strictly increasing convex function of complexity.
Keywords
Citation
Liu, W.-S. and Choi, Y.-M. (2013), "Complexity, Knowledge Asymmetry, and Monopolistic Competition The Case of Retail Structured Product Market", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 21 No. 4, pp. 353-381. https://doi.org/10.1108/JDQS-04-2013-B0001
Publisher
:Emerald Publishing Limited
Copyright © 2013 Emerald Publishing Limited
License
This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode